How did Qlusters fall apart?

The company was yet another victim of the speed at which US venture capital funds close down companies.

Last week Israeli data center technology and services start-up Qlusters Inc. closed down and fired its 30 employees.

On the face of it, this could have been just another story of company that failed to make it and ultimately found itself forced to close down. But the truth is that Qlusters is an entirely different story, and should be of interest to a good many Israeli entrepreneurs seeking to raise finance solely from US venture capital funds.

Central to the Qlusters story is one of the more conspicuous differences between US venture capitalists and their colleagues in Israel, a difference that can be construed as either an advantage or disadvantage on the part of the local venture capital industry - depending on how you look at it. It boils down to the extent of the patience the funds are willing to have for a company that is struggling. In cases like these, US funds usually don't think twice and shut the company down without any further discussion. Israeli venture capital managers, on the other hand, tend to give companies that have lost their bearings another chance to get back on track.

Qlusters was one such story. The company was founded in 2001 and raised a total of $33 million from venture capital funds Charles River, Benchmark Capital and Duff Ackerman & Goodrich LLC. The company also had an Israeli investor, Israel Seed Partners, but as a fund which is currently scaling down its investments, its influence was limited. The decision to wind up Qlusters was taken even though it had $11 million left in cash on the day of its closure. This was no start-up on its last legs, but a company that still had cash in hand that it could work with. But all this was to no avail - the money went back to investors, and Qlusters ended.

Fund raising, sale talks, and hundreds of thousands of downloads

So what went wrong? This collapse was difficult to predict. Qlusters, which developed products based on advanced open source technology, won acclaim and endorsements from the developer community. The company was singled out as a promising start-up almost from day one, and in the summer of 2006, it even held talks on its acquisition with at least two storage giants, EMC Corp. (NYSE: EMC), and Network Appliance Inc. (Nasdaq: NTAP), but these did not lead to a deal.

Only a year ago, Qlusters raised a further $10 million from its existing investors, alongside a unnamed strategic investor in the data storage industry. In addition, its products have seen hundreds of thousands of downloads since they were first launched in 2003.

On completion of the fund raising round last year, a new CEO was brought in - Dror Nemirovsky, formerly VP North American division at Amdocs. Nemirvosky was given the task of finding Qlusters a new more successful strategy, but it didn't work. The field the company targeted - the database management market - is dominated by the big players and the Israeli company struggled to come up with a product that would excite the market. The investors waited a year, and when it was up, they just decided to close the business down.

What would have happened if the investors had been Israeli? It's difficult to tell. One may assume that they would have held off the decision and tried to find a direction for the company, largely because it still some had some cash and a technology that had won acclaim. But Qluster's foreign investors saw things differently. The company is struggling? It can't come up with a strategy that looks promising? No point in wasting any more time, let's move on.

In the US, the dizzying dynamic that divides a promising company that could be an acquisition target from one that investors draw a line under and seal its fate, is far greater than in Israel. Qluster's 30 employees learned this lesson the hard way last week.

Published by Globes [online], Israel business news - - on July 14, 2008

© Copyright of Globes Publisher Itonut (1983) Ltd. 2008

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